Why the new Capital Goods Policy is important for India?

If we have to excel as an economy, we have to excel in the manufacturing sector; specifically, in capital goods sector. Capital goods are goods that are used in the production of other goods. More accurately, capital goods are machineries used for the production of other goods.

According to the draft capital goods policy, “Capital goods consist of plant machinery, equipment and accessories required, either directly or indirectly, for manufacture or production of goods or for rendering services, including those required for replacement, modernization, technological upgradation and expansion of manufacturing facilities.”

Production of good machineries need technological skill of par excellence. Countries like USA, Germany and now China dominate the world economy because they are producers of quality capital goods and are exporting these to other countries to earn foreign currency. The fast development of China was highly contributed by the development of its capital goods industry.

Why capital goods sector is important for India?

If India is to get the next big step towards progress, its industrial sector should reach around 40% of GDP, making more exports of machineries. Similarly, this will reduce dependence on imported machineries and will save foreign exchange. More than anything else, if India develops its own capital goods industry, this will be possible only through technological upgradation and own manpower expansion. Without this industrial sector and capital goods sector India can never become a US or a China.

At present, India’s capital goods sector is in poor state. We import large quantity of machineries from foreign countries especially China. India’s share in global exports of capital goods is very low at 0.8%; compared to its overall goods export share of 1.7%. Capital goods is the second largest import item for India after crude oil. Around Rs. 122,000 Cr worth of capital goods were imported in to India during 2014- 15.

To reverse this, India has to improve its technology, invention and intellectual property culture. It is for this purpose that the government has brought a capital goods policy for the first time.

A major reason for the underdeveloped capital goods sector is low technological depth and R&D, according to the draft policy.

According to the draft policy, India’s current level of technology depth ranges from basic to intermediate, indicating limited ability in fundamental research. India’s rank is 30th in the world on research intensity, with 0.9% of GDP spent in R&D. This is low compared to advanced countries like South Korea (3.6%), Japan (3.4%) and China (3%).

Low technology led to poor manufacturing competitiveness for India. This is reflected in inferior supply base (quantity, quality) and value chain capabilities as an industrial country.

What the capital goods policy says?

The capital goods policy ratified by the Cabinet aims to reduce reliance on imported machineries and to create millions of jobs.

The policy targets to meet domestic requirements from 60% to 80% and thus to become a net exporter. Production of capital goods will be increased to Rs 7.5 lakh crore by 2025 from the present Rs 2.3 lakh crores.

Cabinet’s initial framework about the policy also targets for the restructuring especially financial restructuring of the major PSES and establishment of new IITs.